Equalizing and disequalizing income components: how to decide which is which

Abstract

The purpose of this note is to clarify what is meant by the ‘proportionate contribution’ of an income source to total inequality when the contributions of income sources are examined contemporaneously as opposed to simply measuring the impact of the addition (or exclusion) of an income source. It is shown that the proportionate contribution figures that come out of decomposition by factor components analyses need to be interpreted with caution. They may be misleading if one ignores the fact that those figures depend on the shares of the factors in total income. Another problem could be that the equalizing effect of a relatively more equally distributed factor is overlooked in the interest of treating the factors simultaneously.

Notes

¹ Among the most commonly cited articles on the topic are Rao (1969), Fei et al. (1978), Shorrocks (1982), Lerman and Yitzhaki (1985) and Silber (1989). See Cancian and Reed (1998) for an extensive review.

² Furthermore, Jenkins (1999) has turned the calculation of the proportionate contributions of factors into a straightforward exercise by introducing the program to be executed on STATA.